A history of Greek debt

Feb 5, 2015

- By Bill Bonner

Bill Bonner

Sao Paulo, Brazil

Dear Diary,

We stand with the communists! That's right, shoulder to shoulder, singing the "Internationale" with Syriza, the ruling party of Greece, after an election campaign marked by an unusual degree of honesty.

At least, one party was telling the truth -- when it sent an "open letter" to the voters of another nation!

More on that in a minute. First, let's follow up on our travel memoires. We are a reluctant tourist; wherever we go, nothing quite measures up to Baltimore. Once you have been come to know Charm City, well, there's nothing else like it. Which is too bad for a rogue economist, condemned to wander the earth in search fleeting insights. He sees the most bizarre, appalling, and often fetching, things...and they all remind him of home.

What most struck us about Lake Arenal was that it was as if a there had been a breakout from a garden store. At night, after the guards had gone home, the plants must have escaped and run wild, rooting themselves all over the valley. Flowers and bushes, carefully locked up in Garden Centers in Maryland, are bought and planted around the house for the deer to eat. At Lake Arenal, Costa Rica, they all are on the loose. Huge rhododendron, azaleas, bougainvillea, crepe myrtle - you name it. You have to name it, because we don't know the names. All we know is that these plants look familiar. Along with a lot of plants we've never seen before. It must be a gardener's paradise.

Advertisement

The Complete Equitymaster Conference 2015A Tale of Two Indias - Building Wealth in The New India...

Now Available in An Exclusive 4 DVD Set
(Only For the Next 3 Days!)

The Equitymaster Conference 2015 was an overwhelming success with nearly 250 attendees joining us from all the corners of our country and some even from Middle East...

However, we understand that due to various reasons, you were not able to join us this year.

So, to ensure that you do not miss out on anything that was discussed at the Conference, we've recorded all the sessions and are making them available in an Exclusive 4 DVD Set.

Remember this exclusive 4 DVD set is available for purchase ONLY for the next 3 days...

Now, after an uncomfortable overnight flight from Panama, we're down in Brazil where we are beginning an intensive course of Portuguese. Initial investigation reveals that the grammar is familiar and many of the words could pass for Spanish, but the initial matches are misleading. On the street in Sao Paulo, the sentences rush by like Chinese tourists; each one resembles the other ones, but they are all strangers to us.

Berlitz is supposed to help us distinguish one from another. We'll let you know how it goes.

Meanwhile, yes, strange things are happening elsewhere. Among them is a letter of January 13th, published in Handelsblatt, a bit like the Wall Street Journal for German businessmen. In it, Alexis Tsipras, leader of the 'leftwing' parties that now govern Greece was surprisingly forthright.

In 2010, the Greek state ceased to be able to service its debt. Unfortunately, European officials decided to pretend that this problem could be overcome by means of the largest loan in history on condition of fiscal austerity that would, with mathematical precision, shrink the national income from which both new and old loans must be paid. An insolvency problem was thus dealt with as if it were a case of illiquidity.

In other words, Europe adopted the tactics of the least reputable bankers who refuse to acknowledge bad loans, preferring to grant new ones to the insolvent entity so as to pretend that the original loan is performing while extending the bankruptcy into the future. Nothing more than common sense was required to see that the application of the 'extend and pretend' tactic would lead my country to a tragic state. That instead of Greece's stabilization, Europe was creating the circumstances for a self-reinforcing crisis that undermines the foundations of Europe itself.

A few days ago, we described how Greece had never really taken 'austerity' very seriously. Government spending and debt both rose since the bailout program began. Readers wrote to tell us how wrong we were not to consider the plight of Greek widows and orphans, suffering under the austerity program. Naturally, the thought of human suffering always upsets our stomach and troubles our sleep. When meditation and alcohol failed to stop the torment, we were forced to do further investigation.

And now we are on the side of the commies. Forget austerity!

At least, forget the phony austerity as practiced by the former Greek government and promoted by the IMF and the European elite.

That austerity was never anything more than a scam. It allowed the Greeks to continue spending more than they could afford...while bailing out the banks who had foolishly lent too much to them in the first place. In short, Greek austerity closely resembled America's bailouts, boondoggles, and QE programs of the last 5 years.
A brief history of Greek debt: Since the country became independent in 1828, it has been in default about one year out of two. Then, Goldman Sachs helped disguise Greece's debt burden to get it into the EU financial community. This had the effect of suddenly turning Greece into a decent credit risk. It was able to borrow in euros...with the implied backing of German savers.

This, naturally, led to a lot more debt. As Tsipras tells us, the country was bankrupt by 2010, with about $250 billion of government debt . What do you do when someone can't pay his bills? You write off what he can't pay and let the guy start again. Lenders take the loss they deserve. The borrower has to tighten his belt (a genuine austerity program) and live within his means. Life goes on.

But the banks that had lent billions to Greece saw a way out. If they could get the Greeks to play along, pretending to submit to an 'austerity' program, they could lend even more money. They wouldn't have to write off any debt and eventually they would be bailed out by the central bank.

Their game was going well, until the Greeks decided not to play ball. Now, with $350 billion in government debt, voters seem to have had enough.

What next?

The question on the table: can Greece's new leaders be bought? And at what price?

On the one hand, they were elected for promising to tell the bankers what they could do with their debt. On the other hand, Syriza leaders will be tempted towards "moderation" and "responsibility" - code words for getting a lot more money from the IMF, the ECB...and possibly getting some cushy jobs for themselves. As it stands, they are committed to doing some smart things and some dumb things. Most likely, they'll do both.

Stay tuned.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

When expenditure goes beyond all known sources of income and loans available, the financial crisis starts. In the case of individuals, such crisis is overcome by selling assets and pumping cash into current expenditure. In the case of countries, more is borrowed from various international institutions by coming out with various revival strategies. But history reveals that countries come out of such crisis when they enjoy a generous dose of write-off and waiver and grants etc. Strong Nations lending to weaker nations generally adopt this strategy to save the face of defaulting nations to save the relationship! Greek is no exception to this principle.

ABOUT EQUITYMASTER

Since 1996, Equitymaster has been the source for honest and credible opinions on investing in India. With solid research and in-depth analysis Equitymaster is dedicated towards making its readers- smarter, more confident and richer every day. Here's why hundreds of thousands of readers spread across more than 70 countries Trust Equitymaster.

All rights reserved. Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.